1. A degree program costs $50000 in total expenses: 30000 in tuition and 20000 in housing and books. The US Government provides a grant for 10000 of the tuition. Moreover, the university pays 20000 of the 30000 tuition in salary to your instructors. Being in the program is so much fun, you would be willing to pay a net of 5000, for the pleasure, relative to your alternatives. What is the net cost of the education to you?

2. A project costs 19000 and promises the following cash flow: year 1-$12,500, year 2-$6,000 and year 3- 3000. The appropriate discount rate is 15% per annum. Should you invest in this project?

3. Anentrepreneuris quoted a loan rate of 12% at the local bank, while the bank pays depositors 6% per annum.

(a) If in bankruptcy the entrepreneur will not pay back anything, but otherwise everything will be repaid, then what does the bank believe the probability of failure to be?

(b) What is the quoted default premium?

(c) Compute the expected default premium.